Monetary Policy Communication Research Articles

Heterogeneous inflation expectations: A call for customized monetary policy communication?

The extent to which firms differentiate their inflation expectations between one-year and two-year horizons is an important indicator of changes in inflation expectations. Within a monetary policy framework aimed at reducing the inflation rate toward the target band, firms that obtain information from the central bank are more likely to distinguish between these horizons and expect inflation to converge toward the target. Generally, decision-makers do not differentiate between horizons, but when they do, they are more likely to anticipate convergence. Conversely, external advisors often differentiate between horizons and are more likely to expect divergence. The heterogeneity in how inflation expectations are formed—depending on who within the firm sets these expectations, the information they use, and their use of aggregate inflation expectations data—suggests a need for customized monetary policy communication.

Monetary policy communication shocks and the macroeconomy

AbstractUsing high‐frequency identification, we provide evidence that Fed communication surprises have larger macroeconomic effects than surprise actions. Three ingredients are central to show this: structurally distinguishing between Fed actions and communication, controlling for the Fed information effect, and including the surprise measures directly in a vector autoregression (VAR) system instead of using them as instruments. We also compare the macroeconomic effects of Fed communication surprises relating to varying horizons into the future. Fed communication with a two‐year horizon appears most powerful during the effective lower‐bound period, consistent with theoretical predictions regarding Fed forward guidance.

Financial Conditions and Risks to the Economic Outlook

Financial conditions have swung considerably over the past two and half years. They moved from very accommodative levels in late 2021 to providing a significant drag on economic activity in 2022 and 2023. Since early this year, they eased moderately amid monetary policy communications signaling that the federal funds rate had likely reached its peak for this monetary policy tightening cycle.

Developing Artificial Intelligence-Powered Monetary Policy Communication Indicators for Macroeconomic Inquiries in Ghana

Developing Artificial Intelligence-Powered Monetary Policy Communication Indicators for Macroeconomic Inquiries in Ghana

ECB communication sentiments: How do they relate to the economic environment and financial markets?

In this paper we examine multiple dimensions of ECB monetary policy communication by identifying its sentiment and relation with the economic environment and financial markets. We quantify communication sentiment using transcripts from official ECB communication events – press conferences, accounts and Executive Board speeches – as well as media reactions that highlight the key messages of those events. Importantly, we create distinctive lexicons for both of those communication types. We find that the overall trends in the sentiment indices for the analysed communication events closely resemble the movements of monetary policy stance as well as inflation dynamics in the euro area, both before and after the COVID-19 shock period. The communication tone generally shifts in advance of actual monetary policy actions. Using regression analysis, we find some expected, statistically significant effects of press conference sentiment on bank stock prices (information-type shock) and identify the impact of Executive Board speeches on euro area risk-free rates. Fragmentation issues among euro area member states do not seem to be negatively affected by the sentiments of the ECB’s communication. Still, policy makers should be aware that the tone of their communication events is likely to affect particular financial markets. These results are confirmed by various robustness checks.

Dictionary-based sentiment analysis of monetary policy communication: on the applicability of lexicons

AbstractIn this study, we discuss central bank communication sentiments assessed using different dictionaries. Policy communication by monetary authorities is considered an essential additional policy tool. Various text-mining techniques could evaluate its sentiment. Dictionary methods are a prominent example here because they offer simplicity and are a starting point for applying more elaborate methods. We decided to test four lexicons: generic, economic and financial and two domain-specific lexicons to conclude on their applicability to assess the sentiments of monetary releases and provide recommendations for their further application. This study surveys four lexicons qualitatively and conducts a few exercises: lexicon content comparison, performance tests for highly positive and negative messages, and statistical tests of dictionary alignment and correlation. The sample covers small open economies implementing inflation targeting. The study concludes that all investigated dictionaries could be used for detecting central bank intentions: they do not return contradictory results. The choice among them for a particular study depends on the study’s setup and goals—as presented in our recommendations

The clarity of monetary policy communication and financial market volatility in developing economies

This study investigates the effect of the clarity of monetary policy statements (MPSs) on financial market volatilities by employing linguistic analysis and a panel fixed effects estimator for a newly built dataset drawn from the MPSs of 21 developing countries. Our results show that MPS clarity, measured by complexity and readability indices, negatively affects foreign exchange rate volatility, a key policy variable in developing economies, suggesting that clear central bank communication can reduce financial market volatility. Given the low literacy levels in developing countries, their central banks should make an extra effort to write statements that are easy to comprehend.

ECB monetary policy communication events: Do they move euro area yields?

AbstractThis study aims to determine and compare the impact of four different types of European Central Bank (ECB) monetary policy communication events on euro area sovereign yields on an intraday basis since 2014. Our paper distinguishes it from similar studies in that we analyze a broad range of ECB communication types. The results reveal that ECB decisions and press conferences have the most substantial intraday impact on normalized sovereign yields while the impact of speeches and accounts appears to be much weaker. Countries with the highest debt levels (such as Italy, Spain, and France) experienced the most robust changes in fiscal costs, while the period encompassing the economic shock induced by the Covid‐19 pandemic shows weaker effects.

Understanding Monetary Policy Communication in a Small and Open Economy Under an Exchange Rate Anchor: The Case of North Macedonia

ABSTRACT The aim of this paper is to provide insights into the readability, structure, and tone of monetary policy communication in the case of the National Bank of the Republic of North Macedonia (NBRNM), a small and open economy operating under an exchange rate anchor. The results indicate the NBRNM generally communicates with a neutral tone while its communication is complex in terms of syntax and structure. The dominant topic is inflation and financial markets, followed by monetary policy, economic growth, and the foreign exchange market. Further, topic proportions and tone are analyzed in relation to key macroeconomic indicators.

Language of Markets: Analysing Monetary Policy Communication and Financial Market Reactions in West Africa

Language of Markets: Analysing Monetary Policy Communication and Financial Market Reactions in West Africa

An Empirical Analysis of the Central Bank of China's Monetary Policy and the Impact of its Communications on Market Interest Rates, Liquidity and Credit

As one of the largest world's economies, China’s economy plays an important role at regional and global levels. In this context, with the fast opening steps of the Chinese economy to international markets, the Chinese Central Bank (PBC or PBOC) has adjusted its mechanisms to the needs of local and international economies. Chinese monetary policy is designed to keep prices and economic growth stable and to ensure the country’s economic development. The Chinese Central Bank has a significant influence over Chinese interest rates, interbank rates, and changes in liquidity and credit. The main goal of this research paper is to describe the role of the Chinese Central Bank in delivering Chinese monetary policy and its changes over the past few years. Our research paper is dedicated to verifying how the Chinese Central Bank's press releases are useful indicators for the future trend of market interest rates after constructing a numerical index representative of expansive or restrictive net signals contained in any of the PBC Communications examined. An empirical analysis over Chinese Monetary Policy Communications (Reports) is included in this research paper, presenting how the Central Bank of China is implementing its monetary policy in order to influence the development of its economic growth through its market interest rates, liquidity and credit movement.

Monetary Policy Frameworks and Communication in the Caucasus and Central Asia

Monetary Policy Frameworks and Communication in the Caucasus and Central Asia

New evidence from the monetary policy communication and inflation expectations nexus in Africa

Motivated by the dearth of evidence, we examine the impact of monetary policy communication on inflation expectations in Africa. Employing text-mining techniques to analyse the monetary policy statements of six African central banks, we compute a novel index of monetary policy communication (MPCI) using the extracted word counts, readability, sentiment and tone indicators. We provide new evidence of a positive and statistically significant impact of sentiments, tone and the MPCI on inflation expectations in Africa. Our results also reveal a rising influence of sentiments in anchoring expectations during the COVID-19 pandemic era. Our results are robust to alternative measures of inflation expectation and to global economic uncertainty. We recommend concise and lucid policy statements alongside statements with tone and policy decision consistency for anchoring inflation expectations. Furthermore, investors should carefully analyse and respond to signals from central bank communication, incorporating these insights into their investment strategies and risk management practices.

Research on the Measurement of Central Bank Communication Index and its Impact on the Macroeconomy

With the increasing size of financial assets and the complexity of monetary patterns, countries around the world are gradually becoming more transparent in their monetary policies, using central bank monetary policy communication as a new type of monetary policy instrument. To measure central bank communication more accurately, this paper proposes a dynamic topic model, LDA-BP, based on branching processes, to construct the central bank communication index. At the same time, this paper does four things: it uses the constructed communication index as a proxy variable for the new monetary policy instrument; it builds a TVP-FAVAR model that can extract potential macroeconomic information from many variables, and its time-varying nature can better reflect the dynamic regulatory effect of monetary policy; it constructs a three-dimensional impulse response diagram; and it conducts a systematic analysis of macroeconomic impact. The experimental results of demonstrate its effectiveness on central bank monetary policy communication, as it captures timely information about conventional monetary policy instruments and immediately responds to changes in interest rates and money supply. All three monetary policy instruments are effective in smoothing output volatility, with monetary policy communication having a longer-term impact on the macroeconomy.

Monetary policy communication and inflation expectations: New evidence about tone and readability

We contribute new empirical evidence on monetary policy communication and inflation expectations by firms. First, we construct a new indicator of the perceived tone of monetary policy communication that complements traditional indicators of the effective tone. Both have the expected negative sign and are statistically significant in panel data regressions with firms’ inflation expectations as the dependent variable, suggesting that communication has an important effect over inflation expectations. We also compute readability and perspicuity indicators of the communications. Better readability of monetary policy communication reinforces the effect of the tone. Impact is larger when combined with the indicator of effective tone, suggesting that readability is an important component in monetary policy communication.

Monetary Policy Communication: Perspectives from Former Policymakers at the ECB

AbstractA survey on monetary policy communication among former members of the Governing Council of the European Central Bank (ECB) reveals that enhancing credibility and trust is viewed as the most important objective of communication. Respondents judge communication with financial markets and experts as adequate, but see room for improvement in communicating with the public. The central bank objective is seen as the most important topic. Several respondents perceived the ECB's inflation aim of “below, but close to, 2%” that was in place at the time as ambiguous and in need of clarification. Overall, there is broad consensus on various communication issues.

ECB monetary communications: Market fragmentation at stake

We provide evidence that monetary policy in the Euro Area can unintentionally produce market fragmentation risk. This risk is estimated from changes in long-term bond yields around ECB monetary policy communications between 2002 and 2021. These shocks cause longer-term bond yields in periphery countries to rise significantly, which ultimately hurts their economies. The time series of these shocks are publicly available.

Is the People's Bank of China consistent in words and deeds?

The People's Bank of China (PBC) now frequently uses communication as a policy tool. Whether its words are consistent with its deeds is important for the public to understand the PBC's complex behavior. In this paper, we employ a supervised learning model to construct monetary policy (MP) and economic outlook (EC) communication indices based on the outlook section of quarterly China Monetary Policy Reports (MPRs). We find that the PBC not only adjusts its interventions according to the corresponding economic situation, but also takes into account the information released in the previous outlook section, which indicates its consistency in words and deeds. Using a time-varying parameter model, we further find that the PBC's consistency of words and deeds has made progress over time. The PBC tends to be more consistent in words and deeds under higher uncertainty, and the improvement of such consistency can significantly decrease disagreement about inflation expectations. An additional analysis shows that the full text of MPRs can help predict future monetary policies on a longer time horizon.

New Evidence from the Monetary Policy Communication and Inflation Expectations Nexus in Africa

New Evidence from the Monetary Policy Communication and Inflation Expectations Nexus in Africa

Predictable Errors in Monetary Policy Communications and Decisions

Predictable Errors in Monetary Policy Communications and Decisions